COVER STORY: Industrial Giants Still Struggling to Find New Digital Business Models

Advertising giants like Google and Facebook dominated the first two decades of the digital revolution though they are now being challenged by global ecommerce companies like Amazon and Alibaba.

But will their economic impact be eclipsed by what comes next – the industrial internet? Four years ago we first reported on the plans by industrial mega-vendors to recalibrate their businesses with software at the core.

But GE’s decision to reportedly sell off its digital business (GE Digital) suggests the shift will be fraught.

Evolution of the sector

Incumbents of the heavy industry — GE, Schneider Electric, ABB, and Siemens — have all come to embrace the shift to software and communications infrastructure to monitor heavy assets at scale. Monitoring assets is nothing new, but digital technology means it can now also be done remotely and with greater accuracy, according to Gartner analyst Kristian Steenstrup.

Steenstrup, who has been evaluating industrial software solutions for more than a decade, says the significant investments made by the operational technology giants over the past five years has turned emerging technology concepts, like digital twins (software models of a physical thing) and predictive maintenance, into effective solutions.

Gartner’s Kristian Steenstrup

“We were aware of the term digital twins but nobody was really looking at it as a real thing that you could deploy. Now Siemens and GE have demonstrated the capabilities in delivering digital twin functionality to their customer base,” Steenstrup said.

However, as software businesses, all four industrial giants are facing challenges as the sector evolves. And that’s not surprising, Steenstrup says, given the size and heritage of the enterprises attempting to transform themselves.

“It’s an extremely difficult undertaking and requires firm and consistent leadership from the top over an extended period of time. It’s a long play,” he said.

“Developing and selling software is very different from selling industrial hardware. Additionally across different sub-segments – manufacturing, mining, utilities and oil and gas for example – the ecosystems are different. Just because you are successful in one segment doesn’t translate necessarily to others and that makes things difficult for big industrial horizontal players,” Holmes told Which-50.

“This is one of the challenges industrial will have as they change business models – moving from a transaction environment where the product was sold, and then spare parts were also sold, to a subscription type business – product as a service/software can cause challenges in the financial performance of the business.”

GE falters

One of the most enthusiastic adopters of digital was GE, which under the guidance of former CEO Jeff Immelt, established GE Digital in 2015. The standalone software business, led by former Cisco executive Bill Ruh, aimed to be a “top ten software company” by 2020.

The unit has made strides in developing digital products for industrial use cases, Steenstrup argues. In particular Predix, its cloud-based software platform for industrial applications, and its asset performance management suite (APM).

“What they [GE Digital] came to recognise is that the thing companies will buy, invest in and get value from is using this digital infrastructure to monitor equipment reliability,” Streenstrup said.

“In the course of the last four years, they’ve both developed and acquired software products around that area, which they now call GE APM. That’s the major value component of what they deliver through GE Digital.”

However, under the direction of its new CEO John Flannery GE Digital is facing an uncertain future among a broader corporate restructure. Last month the Wall Street Journal reported the conglomerate was seeking a buyer for GE Digital.

According to Ferran Giones, an assistant professor at the University of Southern Denmark’s Mads Clausen Institute, GE’s bet on digital has floundered.

“The vision was an industrial version of the Internet of Things – sensors and software for GE customers’ industrial equipment to gather data and analyse all the numbers,” Ferran wrote in The Conversation last month.

“GE had the vision, but misjudged how the market would play out. It foresaw competition from other cloud software players like Microsoft or Amazon or industrial software specialists like Siemens or Honeywell, but is struggling to compete with their specialised knowledge and integrated offerings.”

In July GE waived the white flag, announcing it is merging its Predix cloud solution with Microsoft Azure – PR speak for letting Microsoft take over the cloud portion of GE Digital, according to Ferran. He says GE will now concentrate “purely on selling the analytics software”.

It’s a significant step to cede so much control to a partner outside the tightly controlled industry, according to Ferran. But one unlikely to undermine GE’s long earned trust.

“GE clients still trust on their ability to integrate and make work third-party components or solutions,” Ferran told Which-50.

Bringing in cloud experts could also help GE Digital compete in an industry faced with innovative insurgents and customers increasingly demanding data integration, Ferran said.

“The new entrants in the industrial internet industry are proposing innovative solutions, this will increase the client’s pressure to industrial vendors to make their solutions smarter and to facilitate integrated analytics on the client’s side.

“We do not expect a scenario where software apps and data matters more than the ‘hard’ product features (not like computers or smartphones), but where data insights make more visible the product features to the client, and allow the client to enhance their product’s performance.”

“The challenge comes from software companies such as C3IOT and Uptake who are making progress in software platforms agnostic to OEMs,” Wang told Which-50.

“The other category is the cloud companies such as Microsoft, Google, IBM and Amazon who all have aspirations to crunch the IoT data in their clouds.”

However, Wang sees real opportunity as well. “AI plays a key role, especially in machine learning to optimize performance and utilization of plants. It also has a predictive role in identifying, mitigating, and predicting risks and failures.”

He also told Which-50, “5G will play a key role as multiplexing capabilities enable richer signaling and edge computing will play a role in moving some compute to remote endpoints to lower the bandwidth issues.”

And, according to Wang, mixed reality or AR/VR will prove useful in improving field service and maintenance opportunities.

Skepticism

Gartner’s Steenstrup is skeptical about the ability of the IT giants to crack the industrial digital market.

He argues Microsoft, IBM, Google and Amazon “are incredibly adept at large scale data analysis” but deep cultural differences between the two disciplines will stymie their progress.

“While they are technically capable, they may not be accepted in the OT community as much as a heritage OT vendor would be,” he said.

As Streenstrup puts it: In the world of heavy equipment “change is the opposite of good” because change introduces instability and risk. Whereas a traditional IT group, such as GE Digital, change is considered a good thing – “We upgrade, we patch, we change product.”

“If OT practitioners, engineers and operations people view change as the opposite of good, then it is going to be very difficult for some other company outside of their industry to try to introduce that change of thinking,” he said.

So far, GE hasn’t been able to fully bridge the OT-IT divide. Steenstrup attributes GE Digital’s troubles, in part, to the way it structured its software business as a separate unit isolated from GE’s operating divisions.

“The operating divisions didn’t necessarily embrace the GE digital product set and therefore there is still a deal of fragmentation in what GE is doing. GE Digital has developed a capability, but that doesn’t mean their divisions like power and water, oil & gas, aviation have taken that on. In some cases they have developed or invested in their own separate initiatives,” Streenstrup explained.

In terms of competitors, he says it’s unlikely we will see any new “true OT platforms” that manage physical infrastructure, thanks to the risk aversion and invested customer base of the four major vendors.

However, the shift in focus to analytics means new players may emerge as industrial data platforms, without having to be an industrial equipment supplier.

“There will be competitors in the analytics space but it’s not the same as being a true OT platform where you are actually managing physical infrastructure. They are still going to be the products that are deployed for a long time in actually managing complex process environments,” Steenstrup said.

Potential buyers

According to Ferran, if GE Digital does sell, the best buyer is a software firm looking to move into the industrial space. The complexity and structure will likely put off private investors and the price tag may be too high for competitors and IT consulting firms.

“There are many other industrial players taking now steps towards creating their own digital business units, what happens in the next months might influence their decision to invest in their own closed solutions or to go for software partners to respond to the requests of their clients to make use of the products’ data.”

Kevin Bloch chief technology officer, Cisco Australia & New Zealand, expects there will be more deal making in the sector and the industry to evolve more rapidly than it has in the past.

“I expect the industry to gather pace. Given challenges such as culture, one can also expect them to either partner more or consolidate through mergers and acquisitions with traditional IT companies,” Bloch told Which-50.

Bloch noted that the critical systems at the heart of the industrial internet means the incumbents have been slower to adapt than the commercial IT industry.

“This is perhaps due to the fact that the cost of replacing proprietary systems could be significant, but it is also a function of their culture – typically they have been around for decades longer than the FAANGs. They are aware of this and are trying to change,” Bloch said.

IDC notes the evolving industry still has a lot of change ahead of it before all is settled.

“The reality is that the ecosystems that the large industrial businesses are playing in are changing and the previous lines that define who plays where are shifting as well,” Holmes said.

“To make things more complicated, the way that their customers understand their requirements is also changing, so this is a very complicated environment and it will be developing like that for a while yet.”

The Author

Tess Bennett

Tess Bennett is the editor of Which-50 and is responsible for leading the publication’s daily coverage of Australia's digital businesses for C-Suite executives, strategists, founders and directors. As the former editor of Internet Retailing Australia and journalist for Inside Retail, Tess has five years experience covering retail and ecommerce. At Which-50 Tess reports on a broad range of topics including technology, the industrial internet, analytics and digital marketing.

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